UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
for the Fiscal Year Ended July 31, 2024
or
☐ Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-37782
Zedge, Inc.
(Exact Name of Registrant as Specified in its Charter)
(Address of Principal Executive Offices) (Zip Code)
(330)577-3424
(Registrant’s Telephone Number, Including
Area Code)
Title of each class Trading Symbol Name of each exchange on which registered
Class B common stock, par value $0.01 per share ZDGE NYSE American
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting
stock held by non-affiliates of the registrant, based on the adjusted closing price on January 31, 2024 (the last business day of the
registrant’s most recently completed second fiscal quarter) of the Class B common stock of $3.26 per share, as reported on the New
York Stock Exchange, was approximately $38.3 million.
As of October 28, 2024, the registrant had outstanding
524,775 shares of Class A common stock and 13,618,761 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the
registrant’s Annual Meeting of Stockholders, to be held January 15, 2025, is incorporated by reference into Part III of this Form
10-K to the extent described therein.
Index
Zedge, Inc.
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 42
Item 2. Properties 44
Item 3. Legal Proceedings 44
Item 4. Mine Safety Disclosures 44
Item 6. [Reserved] 46
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 64
Item 8. Financial Statements and Supplementary Data 64
Item 9A. Controls and Procedures 64
Item 9B. Other Information 64
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 64
PART III 65
Item 11. Executive Compensation 65
Item 14. Principal Accounting Fees and Services 65
Item 15. Exhibits, Financial Statement Schedules 66
SIGNATURES 68
i
PART I
As used in this Annual Report, unless the context
otherwise requires, the terms the “Company,” “Zedge,” “we,” “us,” and “our”
refer to Zedge, Inc., a Delaware corporation, and its subsidiaries, collectively. Our fiscal year runs from August 1 through July 31.
Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the calendar year indicated (for example, fiscal
2024 refers to the fiscal year ended July 31, 2024).
Item 1. Business
Company Overview
Zedge builds digital marketplaces and friendly
competitive games around content that people use to express themselves. Our leading products include Zedge Ringtones and Wallpapers, which
we refer to as our “Zedge App,” a freemium digital content marketplace offering mobile phone wallpapers, video wallpapers,
ringtones, and notification sounds as well as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and
Emojipedia, the #1 trusted source for ‘all things emoji’. Our vision is to enable and connect creators who enjoy friendly
competitions with a community of prospective consumers in order to drive commerce.
We are part of the ‘Creator Economy,’
which Goldman Sachs estimates is worth $250 billion globally.1 According to Linktree, over 200 million individuals identify
as creators, people who use their influence, skill, and creativity to amass an audience and monetize it.2 Furthermore, Influencer
Marketing Hub reports that out of 2,000 surveyed creators, 44.9% identify as full-time creators,3 and Exploding Topics reports
that 10% of influencers earn more than $100,000 per year.4 We view the Creator Economy as an opportunity for Zedge to expand
our business, especially as we execute by connecting our gamers with our marketplace.
Our Zedge App (which is named “Zedge Wallpapers” in the
App Store) offers a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones, and notification sounds,
and is available both in Google Play and the App Store. As of July 31, 2024, our Zedge App had been installed nearly 674 million times
since inception and, over the past two fiscal years, has had between 26.1 million and 32.2 million monthly active users (“MAU”),
ending with 26.1 million MAU as of July 31, 2024. MAU is a key performance indicator (“KPI”) for our Zedge App that captures
the number of unique users that used our Zedge App during the final 30 days of the relevant period. Our platform allows creators to upload
content to our marketplace and avail it to our users either for free or, via ‘Zedge Premium,’ the section of our marketplace
where we offer premium content for purchase. In turn, our users utilize the content to personalize their phones and express their individuality.
In fiscal 2023, we introduced pAInt, a generative
AI wallpaper maker in the Zedge App. A generative AI wallpaper maker is an implementation of artificial intelligence software that can
create images from text descriptions. To interface with a generative AI image maker, a user enters a text description of the image they
want to create, and the software generates an image based on that description. In addition, we upgraded Zedge+, our paid subscription
offering by bundling together an ad-free experience with value adds making the offering more compelling.
We often refer to our freemium ringtones and wallpapers,
our subscription offering, the functionality for creators to market their products and ancillary offering and features both in our Zedge
App and website, as our Zedge Marketplace.
The Zedge Marketplace’s monetization stack
consists of advertising revenue generated when users view advertisements when using the Zedge App (and the related functionality under
the zedge.net website), the in-app sale of Zedge Credits, our virtual currency, that is used to purchase Zedge Premium content, and a
paid-subscription offering that provides an ad-free experience to users that purchase a monthly or annual subscription. In April 2023,
we introduced a subscription tier in the iOS version of the app. As of July 31, 2024, we had approximately 669,0000 active subscribers.
2 https://linktr.ee/creator-report
3 https://influencermarketinghub.com/creator-earnings-benchmark-report
4 https://explodingtopics.com/blog/creator-economy-stats#
1
In April 2022, we acquired GuruShots Ltd (“GuruShots”)
a recognized category leader focused on gamifying the photography vertical. GuruShots offers a platform spanning iOS, Android, and the
web that provides a fun, educational and structured way for amateur photographers to compete in a wide variety of contests showcasing
their photos while gaining recognition with votes, badges, and awards. We estimate that the total addressable market of amateur photographers
using their smartphones to take and publicly share artistic photos is 30-40 million people per month and that the market is still in its
infancy. Every month, GuruShots stages more than 300 competitions that result in players uploading in excess of 670,000 photographs and
casting close to 3.2 billion “perceived votes,” which are calculated by multiplying the number of votes that each player casts
by a weighting factor based on various factors related to that user. To improve engagement, GuruShots has adopted a set of retention dynamics
focused on individual, team and community dynamics that create a sense of belonging, inspiration, recognition, improvement, and competition.
GuruShots utilizes a ‘Free-to-Play’
business model and generates revenue through in-app purchases of virtual currency. Players can use this currency to unlock competitions
or gain an edge by purchasing resources and participating in additional gameplay. Over the past seven years, the monthly average paying
player spend has increased in excess of 9.9% annually to more than $50.9 per player.
In fiscal 2024, we revamped GuruShots’ customer
onboarding experience by guiding new players through simplified photo competitions of limited size and duration. The upgrade was designed
to enhance the gaming experience for new players by increasing their potential for winning and providing immediate gratification. The
new onboarding has shown improvements in engagement, retention, and revenue from new users. In addition, we migrated to a coin-based economy
with multiple currencies in order to enable more players to earn and spend their currency on in-game resources.
We market GuruShots to prospective players, primarily
via paid user acquisition channels, and utilize a host of creative formats including static and video ads in order to promote the game.
Our marketing team invests material resources in analyzing all attributes of a campaign ranging from, among others, the creative assets,
offer acquisition channel and platform (i.e., iOS, Android, and web), with the goal of determining whether a specific campaign is likely
to yield a profitable customer. When we unearth a successful combination of these variables we scale up until we experience diminishing
returns. Ultimately, we believe that the efforts we are making to advance the product coupled with the investment in user acquisition
can significantly increase GuruShots’ player base.
Since the start of fiscal 2025, Cost per Install (CPI) have trended
down considerably leading us to believe that our efforts are yielding fruit. It’s too early to say with conviction whether this
trend is sustainable as we scale user acquisition and whether these users will provide sufficient long-term ROI; however, we believe that
these early results are encouraging.
Beyond our commitment to growing both the Zedge
App and GuruShots on a standalone basis, we believe that there are many potential synergies that we can capitalize on that exist between
the two businesses. Specifically, we plan to enable GuruShots players to become Zedge Premium artists and sell their photos to our audience
of 25+ million MAU (as of July 31, 2024) as standard digital images. In addition, we are benefitting from the experience that the GuruShots
team possesses in gamifying the Zedge App. We believe that successful gamification can contribute to increasing engagement, retention,
and lifetime value, all critical KPIs for our business. Longer term, we believe that there are complementary content verticals that lend
themselves to gamification. One example is our hybrid casual title, ‘AI Art Master,’ which has been in soft-launch in the
Philippines, Poland, and India, that enables players to create generative AI images and compete in themed-based competitions with these
images. Based on analyzing user data and performing extensive user testing, we will determine whether to refine the user experience and
scale or cease development of this title.
2
In August 2021, we acquired Emojipedia Pty Ltd
(“Emojipedia”), the world’s leading authority dedicated to providing up-to-date and well-researched emoji definitions,
information, and news, as well as World Emoji Day and the annual World Emoji Awards. In July 2024, Emojipedia received approximately 37.6
million monthly page views and has approximately 9.6 million monthly active users as of July 31, 2024 of which approximately 46.7% are
located in well-developed markets. It is the top resource for all things emoji, offering insights into data and cultural trends. As a
member of the Unicode Consortium, the standards body responsible for approving new emojis, Emojipedia works alongside major emoji creators
including Apple, Google, Meta, and X, formerly known as Twitter.
We believe that Emojipedia provides growth potential
to the Zedge App, and it was immediately accretive to earnings post acquisition in August 2021. In the past year, we have made many changes
to Emojipedia including overhauling its backend, redesigning the Emojipedia website, and introducing new entertainment-focused features
to the site. We will continue to enhance this offering and are exploring additional new features which use artificial intelligence, some
of which will be released before the end of the calendar year.
Our Strategy
Our vision is to provide tools that enable easy
and high-quality digital content creation, connect the creators together with friendly competitions and expose the content to communities
of prospective consumers in order to drive commerce.
Our Strategic Flywheel
Our long-term strategy calls for creating and
supporting a flywheel that leverages the synergies of content creation, gaming and marketplaces by empowering consumers with easy-to-use
content creation utilities whose output can be used to engage across a multitude of online and mobile platforms including social networks,
messaging, and gaming as well as for commerce purposes. This is unlike the existing dynamic that many gaming platforms offer to players,
who can create and sell virtual goods that are valuable only within the context of that particular ecosystem. Although the foundation
of our strategy is currently centered around the Zedge Marketplace and GuruShots, over time we expect to expand into other content verticals
that have relevance beyond gameplay.
Using our current products as an example, GuruShots
is a skill-based game that attracts creators (mainly, amateur photographers) with friendly photo competitions in which they compete to
gain recognition and pedigree. We believe that adding the ability to sell their content to Zedge Marketplace’s 25+ million MAU is
an attractive benefit that enables players not only to have fun, but also to earn money while doing so. This dual purpose will likely
improve user growth, engagement, retention, and monetization while simultaneously expanding our relevance to a broader community interested
in high-quality photographs. If our strategy is correct, we will have a flywheel that drives the aforementioned KPIs while also enabling
us to expand into new verticals (through internal development or acquisition), gamify them, and add new content to our marketplace.
Executing this strategy calls for concentrating
our efforts on the following goals:
3
○ expanding our reach by collaborating with strategic partners.
4
Our Competitive Advantages
We believe that the following competitive strengths
will drive the growth of our business:
5
Competition
We face competition in all aspects of our business
and especially from other digital marketplaces and gaming companies. In running our business, we compete for:
○ large user base;
○ large content catalog;
○ recognized and well-respected brands;
○ proprietary recommendation engine; and
○ market ranking and longevity.
6
Our History
In 2003, Tom Arnoy, Kenneth Sundnes, and Paul
Shaw launched a consumer website at www.zedge.net that people used to upload and download ringtones.
In December 2006, IDT Corporation acquired 90%
of Zedge. Zedge Holdings, Inc. was incorporated in Delaware in 2008, and our name was changed to Zedge, Inc. in 2016.
In 2016, IDT Corporation spun off our stock to its stockholders, and
our Class B common stock was listed on the NYSE American with the ticker symbol “ZDGE”.
In March 2018, we completed the launch of Zedge
Premium, a section of our marketplace where artists can launch a virtual store and market, distribute, and sell their digital content,
including wallpapers, video wallpapers, ringtones, and notification sounds to our users.
In January 2019, we started offering freemium
Zedge App Android users the ability to convert into paying subscribers in exchange for removing unsolicited advertisements from our Zedge
App. As of July 31, 2023, we had approximately 638,000 active subscribers. In April 2023, we introduced a subscription tier in the iOS
version of the app.
In August 2021, we acquired Emojipedia, the world’s
leading authority dedicated to providing up-to-date and well-researched emoji definitions, information, and news as well as World Emoji
Day and the annual World Emoji Awards.
In April 2022, we acquired GuruShots, a recognized
category leader that fuses photography with mobile gaming. GuruShots, headquartered in Israel, offers a platform spanning iOS, Android,
and the web that gamifies photography by providing a fun, educational, and structured way for amateur photographers – essentially
anyone with a mobile phone – to compete in a wide variety of contests showcasing their photos while gaining recognition with votes,
badges, and awards. On a monthly basis, GuruShots users currently cast more than 3 billion “perceived votes” in more than
300 competitions. GuruShots currently generates revenue from selling digital resources that, if used skillfully, can provide additional
visibility to competitors’ photographs, a critical factor in securing votes for competitive ranking.
In December 2022, we introduced ‘pAInt’
our generative AI wallpaper maker within the Zedge App. pAInt enables users to create high quality images by typing a brief description
of what they are interested in and tuning with different style types.
Our Technology
Our ecosystem is powered by a scalable distributed
platform that comprises both open source and proprietary technologies centered on content management and discovery, web and app development,
data science and analytics, deep learning, mobile content/device compatibility, advertising/marketing tech, and reporting. We have built
a robust platform that allows us to ideate, test, analyze, and launch where warranted by the outcome. We enhanced our users’ content creation
options with generative AI models, we embraced machine learning, including AI and LLM throughout our technology stack in order to improve
content recommendations and relevancy. From an end user’s perspective, our platform minimizes response latency while factoring in
cost and focuses on key areas including content creation, relevancy and discoverability. We optimize our platform by utilizing systems,
algorithms, and heuristics that organize our content based on real user data and that renders the content in a relevant fashion. We focus
on delivering the highest quality content to users while minimizing our infrastructure costs on used bandwidth. With GuruShots, we have
added open source and proprietary technologies around gamification, including ranking algorithms that ensure fair exposure to all content
in a competition, and real-time voting/ranking functionality at scale, and a personal competition recommendations system based on users’
photos and historical activity. Our infrastructure provides a fully redundant production environment in a cloud-hosted, virtual-server
environment.
Intellectual Property
Our trademarks, copyrights, domain names, proprietary
technology, know-how, and other intellectual property are vital to our success. We seek to protect our intellectual property rights by
relying on federal, state, and common law rights in the United States and other countries, as well as contractual restrictions. We enter
into confidentiality and nondisclosure agreements with our employees and business partners. The agreements we enter into with our employees
also provide that all software, inventions, developments, works of authorship, and trade secrets created by them during the course of
their employment are our property.
7
We have been granted trademark protection for
“Zedge” in the United States, European Union, United Kingdom, India, and Canada, “We Make Phones Personal,” and “Zedge,
Everything You,” “Tattoo Your Phone,” “Shortz – Chat Stories By Zedge,” and “NFTs Made Easy” in
United States and a stylized “D” logo in the European Union, United Kingdom, the United States, and Canada. We also have
applied for trademark protection for “pAInt,” and “Zedge pAInt” in the United States, a stylized “D”
logo in India, and have obtained a copyright registration for our flagship app, Zedge. In addition, we have registered, amongst others,
the following domain names: www.zedge.net and www.zedge.com.
On August 1, 2021, we acquired Emojipedia. As
part of this acquisition, we acquired trademark registrations for “Emojipedia” in the United States, the European Union, the
United Kingdom, and Australia, and trademark registrations for “World Emoji Day” in the United States and the United Kingdom.
We also acquired the following domain name registrations: www.emojipedia.com and www.emojipedia.org.
On April 12, 2022, we acquired GuruShots Ltd. As part of this acquisition,
we acquired all intellectual property rights associated with, and encompassed within the GuruShots mobile and web-based applications,
including the following domain name: GuruShots.com. In addition, we have obtained trademark registrations for “GuruShots”
in the United States, applied for trademark protection for “GuruShots” in Canada, India, the European Union and the United
Kingdom, and have obtained copyright registrations for the GuruShots mobile and web-based applications.
Human Capital
Our headcount totaled 99 as of July 31, 2024.
Facilities
We do not maintain office space in the United States in light of having
a small domestic team. We address certain aspects of our commercial operations, including accounting and finance, and business development
from the New York area. We maintain leased facilities in Trondheim, Norway and Vilnius, Lithuania that accommodate our product, design,
monetization, marketing and technology teams, and in Tel Aviv, Israel that accommodates members of both the GuruShots and Zedge teams.
Our servers are hosted in leased data centers in different geographic locations in the United States.
Item 1A. Risk Factors
Our business, operating results or financial
condition could be materially adversely affected by any of the following risks associated with any one of our businesses, as well as the
other risks highlighted elsewhere in this document, particularly the discussions about competition. The trading price of our Class B common
stock could decline due to any of these risks.
Risk Factor Summary
Our business operations
are subject to numerous risks and uncertainties, including those outside of our control, that could cause our business, financial condition
or operating results to be harmed, including, but not limited to, risks regarding the following:
8
9
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Certain of our offerings are sensitive to consumer
spending and economic conditions.
Consumer purchases of discretionary retail items
and specialty retail products, as well as participation in gallery events, may be adversely affected by national and regional economic,
market and other conditions such as employment levels, salary and wage levels, the availability of consumer credit, inflation, high interest
rates, high tax rates, high fuel prices, the threat of a pandemic or other health crisis and consumer confidence with respect to current
and future economic, market and other conditions. Consumer purchases may decline during recessionary periods or at other times when unemployment
is higher or disposable income is lower. Consumer willingness to make discretionary purchases may decline, may stall or may be slow to
increase due to national and regional economic conditions. There remains considerable uncertainty and volatility in the national and global
economy. Further or future slowdowns or disruptions in the economy, market and other conditions could adversely affect us and our business
strategy. We may not be able to sustain or increase our current net sales if there is a decline in consumer spending.
We offer a suite of freemium apps and we may
not be successful in adding new users or in retaining existing users, or if our users decrease their level of engagement with our products
or do not make optional purchases of tokens, coins, resources, or content, or convert into paying subscribers and renew their paid subscriptions
our revenue, financial results and business may be significantly harmed.
The size of our user base and our users’
level of engagement and paid conversion are fundamental to our success. Our financial performance has been and will continue to be dependent
on our ability to successfully add new users, retain and engage existing users and convert them into paying users and/or subscribers.
We expect that the size of our user base will fluctuate or decline in one or more markets from time to time. If consumers and/or creators
do not perceive our products as useful, effective, entertaining, reliable, and/or trustworthy, we may not be able to attract or keep users
or otherwise maintain or increase the frequency and duration of their engagement or the percentage of users that are converted into or
remain paying subscribers. There is no guarantee that we will not experience a decline in our user base or engagement levels. User engagement
can be difficult to measure, particularly as we introduce new and different products and services, and as various privacy regulations
evolve. Any number of factors can negatively affect user retention, growth, engagement and conversion, including if:
10
● we fail to combat inappropriate or abusive activity on our platforms;
● we are unable to offer relevant content to our users;
● we fail to provide adequate support for our users and creators;
Certain of these factors have, at various times,
negatively impacted user and creator growth, MAU and engagement. If we are unable to maintain or increase our user base and user engagement,
our revenue and financial results may be materially adversely affected.
We may not experience growth or engagement
in certain geographic locations due to local factors.
We may not experience rapid user growth or continued engagement in
countries that have unreliable telecommunications infrastructure or in countries where mobile and internet usage are expensive or limited
in regular accessibility. Any decrease in user retention, growth or engagement may have a material and adverse impact on our popularity,
revenue, business, reputation, financial condition, and results of operations.
11
We may not be successful in acquiring a sufficient
number of users that become purchasers or retain existing users who generate profitable revenue for our apps.
Revenues of freemium apps and websites typically
rely on a small percentage of users that convert into paying users by making in-app purchases of digital goods and/or paid subscriptions;
however, the vast majority of users play for free or only occasionally make purchases or opt-in for paid subscriptions. Accordingly, only
a small percentage of our users are paying users. In addition, a small portion of paying users generate a disproportionate percentage
of revenue. Because of this, it is imperative for us to both retain these valuable customers and to maintain or increase their spend over
time. In fiscal 2024, we experienced an 8% decline in paid subscriptions. Conversely, over the past seven years, GuruShots has successfully
increased the compounded annual growth rate of monthly spending per paying player by around 9.9%. There can be no assurance that we will
be able to continue to retain paying users, grow or maintain subscription levels or that paying users will maintain or increase their
spending. We may experience a net decline in paying players resulting in a decrease in revenue resulting in a materially adverse outcome
for our business and financial results.
We may not manage our in-app economy well and
as a result, disincentivize users from making in-app purchases. Any failure to do so could adversely affect our business, financial condition,
and results of operations.
Our apps are available to players for free and
each brand generates a material portion of its revenue by selling digital goods and/or paid subscriptions. The perceived value of these
digital goods and/or paid subscriptions can be impacted by various factors including, but not limited to, their price, discounting policies,
promotional strategies, market competition, user reviews, and user engagement levels. If we fail to manage our economy well, we risk confusing
or upsetting users to the point that they reduce their purchases which could negatively hurt the business.
If we are unable to compete for advertisers
or if advertisers reduce their spend with us, our revenues, profitability and prospects may be materially and adversely affected.
In fiscal 2024, approximately 79% of our revenues
(excluding GuruShots) were generated from selling advertising inventory. We generally enter into arrangements with the major programmatic
advertising networks to monetize our advertising inventory. We need to maintain good relationships with these advertising networks to
provide us with a sufficient inventory of advertisements. Online advertising, including through mobile applications, is an intensely competitive
industry. Many large companies, such as Applovin, Meta and Google, invest significantly in data analytics to make their properties and
platforms more attractive to advertisers. Our advertising revenue is primarily a function of the number and hours of engagement of our
free users and our ability to provide innovative advertising products that are relevant to our users, maintain or increase user engagement
and satisfaction with our products, and enhance returns and add incremental gains for our advertising partners. If our relationship with
any advertising partners terminates for any reason, or if the commercial terms of our relationships are changed or do not continue to
be renewed on favorable terms, or if we cannot source high-quality ads consistent with our brand or product experience, we would need
to qualify new advertising partners, which could negatively impact our revenues, at least in the short term.
In addition, internet-connected devices and operating
systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the
delivery of advertising on their devices or reduce the ability to provide personalized or targeted advertising, which results in less
valuable ads. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For
example, when Apple announced that UDID, a standard device identifier used in some applications, was being superseded and would no longer
be supported, application developers were required to update their apps to utilize alternative device identifiers such as universally
unique identifier, or, more recently, identifier-for-advertising, which simplifies the process for Apple users to opt out of behavioral
targeting. Furthermore, laws and regulations may also make it more difficult to deliver personalized or targeted advertising or impose
requirements that result in more users making elections to block our ability to deliver targeted ads. If users do not elect to participate
in functionality that supports the delivery of targeted advertising on their devices, our ability to deliver effective advertising campaigns
could suffer, which could cause our business, financial condition, or operating results to be adversely affected.
We anticipate that our growth and profitability
will continue to depend on our ability to sell our advertising inventory. Companies that advertise with us may choose to utilize other
advertising channels or may reduce or eliminate their marketing altogether for a variety of reasons, many of which are out of our control,
including, without limitation, if the demand for mobile phone personalization industry declines or otherwise falls out of favor with advertisers
or consumers.
If the size of the digital advertising market
does not increase from current levels, or if our digital brands are unable to capture and retain a sufficient share of that market, our
ability to maintain or increase our current level of advertising revenues and our revenues, profitability and prospects could be materially
and adversely affected.
12
The digital advertising market may deteriorate,
which could materially harm our business and results of operations.
We generate the substantial majority of our revenue
from selling advertising inventory. We anticipate that our growth and profitability will continue to depend on our ability to sell advertising
inventory across some if not all of our digital brands.
Future demand for mobile advertising is uncertain.
Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising
budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources
to mobile advertising.
Further, our advertisers’ ability to effectively
target their advertising to our user’s interests may be negatively impacted by the degree to which our privacy control measures
that we have implemented or may implement in the future in connection with regulations, regulatory actions, the user experience, or otherwise,
and our advertising revenue may decrease or otherwise be curtailed as a result. Changes to operating systems’ practices and policies,
such as Apple’s deprecating the Identifier for Advertisers (“IDFA”) and Google’s Privacy Sandbox which is meant
to make current tracking mechanisms obsolete, and block covert tracking techniques, like fingerprinting may also reduce the quantity and
quality of the data and metrics that can be collected or used by us and our partners. These limitations may adversely affect our advertisers’
ability to effectively target advertisements and measure their performance, which could reduce the demand and pricing for our advertising
products and harm our business. As such, our digital property’s current and potential advertiser clients may ultimately find digital
advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products
and services, and they may even reduce their spending on mobile advertising from current levels as a result or for other reasons.
If the market for mobile advertising deteriorates,
we may not be able to increase our revenues or our revenues and profitability could decline materially.
A material amount of our revenue is generated
from a limited number of geographies and third-party advertising demand partners. Any change to this mix could result in negatively impacting
our business, financial condition, and results of operations.
In fiscal 2024, revenue from well developed economies
accounted for approximately 80% of our total revenues and 69% of our total advertising revenues were generated by three advertising demand
partners. While our end users are located around the world, the revenue is generated in the United States from our advertising partners.
During the past five years, we have experienced a shift in our Zedge App’s regional customer make-up with the percentage of our
total MAU from emerging markets increasing, while the portion from well-developed markets is decreasing. In fiscal 2024, 79% of our Zedge
App’s users were located in emerging markets with 21% of users in well-developed regions compared to 78% and 22% respectively in
fiscal 2023. India comprised 30% of our MAU as of July 31, 2024. This shift has negatively impacted revenues because well-developed markets
command materially higher advertising rates when compared to those in emerging markets. Although we are investing in reversing this trend,
we may not be successful in this effort which may result in lower revenues and profitability. Although GuruShots’ and Emojipedia’s
user bases are more heavily weighted to well-developed economies, we are still exposed to the impact of a shift in our Zedge App’s
user base toward emerging markets.
Three advertising demand partners, mainly, Google,
Vungle and AppLovin were responsible for 69% of overall advertising revenue in fiscal 2024. If any of these advertising demand partners
were to alter their spend on our digital properties the outcome could result in lowering revenues and profitability.
In addition, on April 24, 2024 President Joe Biden signed a bill that
would ban TikTok in the United States if ByteDance, TikTok’s Chinese owner, didn’t sell the platform to a non-Chinese owner
within nine months. Although TikTok is challenging the legality of this bill in court it is unclear if they will prevail. The negative
impact of a TikTok ban could be material impacting advertising and ecommerce. In light of TikTok running ads in Zedge’s platform
a ban could negatively impact revenue.
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Our apps’ user base is heavily weighted
to the Android operating system and our revenues and profitability may suffer if the market demand for Android smartphones decreases.
Our apps’ user base is heavily weighted
to smartphones running the Android operating system, which constituted approximately 96% of our MAU (excluding Emojipedia) as of July
31, 2024, and most of our revenues for fiscal 2024. Any significant downturn in the overall demand for Android smartphones or the use
of Android smartphones could significantly and adversely affect the demand for our products and services and would materially affect our
revenues.
Although the Android smartphone market has grown
rapidly in recent years, it is uncertain whether the Android smartphone market will continue growing at a similar rate in the future.
In addition, due to the constantly evolving nature of the smartphone industry, another operating system for smartphones may eclipse the
Android operating system and result in a decline in its popularity, which would likely adversely affect our apps’ popularity. To
the extent that our products and services continue operating on Android smartphones and to the extent that our future revenues substantially
depend on the use and sales of Android smartphones, our business and financial results would be vulnerable to any downturns in the Android
smartphone market.
We may not be successful in diversifying our
revenue mix in order to reduce our significant dependence on third-party advertisers.
In fiscal 2024, approximately 79% of our revenues
excluding GuruShots were generated from advertising sales. We cannot assure you that we will be successful in diversifying our revenue
mix by identifying new revenue drivers that complement our advertising-heavy business. Although the Zedge App had initial success in converting
freemium users into paid subscribers, starting with zero in January 2019 and ending fiscal 2023 with approximately 647,000, we ended fiscal
2024 with 669,000 subscribers, a 3.4% increase and there is no guarantee that we will be successful in improving subscriber base growth
or in maintaining our current subscriber base. To date, Zedge Premium has taken longer to scale than we originally anticipated. Furthermore,
we are still integrating GuruShots and have not achieved its expected growth trajectory or realized synergies between GuruShots and our
legacy operations. Finally, Android users constitute approximately 96% of our overall MAU and are prone to spend less money in apps than
iOS and web users. Even if our new initiatives are successful on one platform, we may not be able to replicate that success across other
platforms.
Our revenues may fluctuate materially due to
increases and decreases of new mobile device sales, or other factors, over which we have no control.
Our revenue may be materially negatively impacted
by a decrease or slowdown in new mobile device sales. Demand for mobile devices highly correlates to installs of our apps and associated
usage and revenue generation.
If new mobile device sales decrease or slowdown,
our products and services will likely experience fewer installations which will negatively impact our revenue and operations.
We rely on third-party platforms, such as the
iOS App Store, Meta, and Google Play Store, to distribute our apps and collect revenues generated on these platforms. If these platforms
adopt policies including those relating to advertising, privacy, or monetization that are counter to our strategy it could result in materially
and adversely affecting our business.
Our products and services depend on mobile app
stores and other third parties such as data center service providers, as well as third party cloud infrastructure and service providers,
payment aggregators, computer systems, internet transit providers and other communications systems and service providers. Our mobile applications
are almost exclusively accessed through and depend on the Google Play Store and Apple’s App Store. While our mobile applications
are generally free to download from these stores, we offer our users the opportunity to make in-app purchases and/or purchase paid subscriptions.
In certain instances, we determine the prices at which these items and subscriptions are sold. These purchases are processed by Google’s
and Apple’s in-app payment and subscription systems. As of July 31, 2024 we paid Google and Apple up to 30% of the revenue we generated
across their respective platforms for processing fees. Our revenues and earnings could be negatively impacted should Google or Apple decide
to impose higher processing fees. Further, our cashflow may be negatively impacted if either platform changes the timing of their payments
to us. While we do not anticipate any interruption in their distribution platforms or ability to accept customer payments, any such disruptions,
even temporary, may have material impacts on our business and operations.
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We are subject to the standard policies and terms
of service of third-party platforms, which govern the marketing, promotion, distribution, content and operation of our apps on their platforms.
Each platform provider has the discretion to make changes to its operating system, payment services, manner in which their mobile operating
system operates as well as change and interpret the terms and conditions of its developer policies. These changes may be harmful to our
business and result in a negative outcome. For example, in September 2019, our Zedge App was temporarily removed from Google Play because
they asserted that the Zedge App violated their malicious behavior policy. As a result, prospective Android users were prevented from
installing our Zedge App, freemium users were unable to convert into paying subscribers and existing users we unable to purchase Zedge
Credits. Shortly after the notice was issued, two of our major advertising suppliers ceased serving advertisements to our Zedge App. In
addition, Google Play sent a notification to users that had the problematic version of the app on their phone recommending that they uninstall
it. We identified the source of the problem as buggy code from a long-term, third-party advertising partner’s standard technology
integration in our app. We corrected the problem by removing the offensive code, releasing a new version of our app and our Zedge App
was reinstated after approximately 72 hours and concurrently the two major advertising suppliers resumed purchasing our advertising inventory.
We estimate the immediate financial impact of the suspension resulted in approximately $100,000 in lost revenue and a material decline
in MAU with the majority of uninstalls in emerging markets.
Such changes could:
● make our products and services inaccessible or limit their accessibility;
● impose changes in the way in which we monetize our users;
● limit the scope of feature enhancements or new features;
Google and Apple are able to terminate our distribution
agreements with them, without cause, with 30 days prior written notice (to the extent allowed by applicable local law). They also may
terminate our agreements with them immediately (unless a longer period is required by applicable law) under certain circumstances, including
upon our uncured breach of such agreements. To the extent that they or any other third party platform provider on which we rely make such
changes or terminates our agreements with them, our business, financial condition and results of operations could be materially adversely
affected.
A platform provider may also change its fee structure
to our disadvantage, change how we are able to advertise on the platform, limit how user information is made available to developers,
curtail how personal information is used for advertising purposes, or restrict how users can share information with their friends on the
platform or across platforms. For example, in April 2021 Apple released iOS 14 which started requiring users to opt in to share their
IDFA with app developers, on an app-by-app basis. As a consequence, the ability of advertisers to accurately target and measure their
advertising campaigns at the user level becomes significantly more difficult, typically resulting in higher user acquisition costs.
Furthermore, both Apple and Google have broad
discretion to make changes to their operating systems or payment services or change the manner in which their mobile operating systems
function and their respective terms and conditions applicable to the distribution of our applications, including the amount of, and requirement
to pay, certain fees associated with purchases required to be facilitated by Apple and Google through our applications, and to interpret
their respective terms and conditions in ways that may limit, eliminate or otherwise interfere with our products, our ability to distribute
our applications through their stores, our ability to update our applications, including to make bug fixes or other feature updates or
upgrades, the features we provide, the manner in which we market our in-app products, our ability to access native functionality or other
aspects of mobile devices, and our ability to access information about our users that they collect. To the extent either or both of them
do so, our business, financial condition and results of operations could be materially adversely affected.
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For example, pursuant to Google’s policy
whereby only Google Play’s in-app billing system could be used for transactions in its store, we were mandated to stop the provision
of non-native payment options to our users on Android during 2021, which caused disruptions for users and led to a decline in Paying Users.
Since announcing this policy in 2020, following industry pushback and country-specific regulations Google has introduced in select markets
the option of “user choice billing,” which allows eligible developers to offer users an additional billing system alongside
Google Play’s billing system, and in the European Economic Area the option for eligible developers to offer users an alternative
to Google Play’s billing system. We are exploring such solutions on a country-by-country basis. However, as these solutions are
in their infancy, they may evolve following subsequent regulatory mandates or organically at Google’s behest, and as such we will
need to be ready to continuously adapt to such changes. Any deadlines imposed on developers by future iterations of Google’s policy
will require prompt and active development, and failure to do so may result in the discontinuation of the provision of alternative billing
methods to our users.
Similarly, Apple is experiencing industry pushback
and country-specific regulations. In response to a recent antitrust lawsuit, Apple now allows all digital apps in the United States to
include a link to the developer’s website to process payments for in-app purchases. Additionally, in the EU, pursuant to the Digital
Markets Act, all major app store operators such as Google and Apple will be forced to introduce more country-specific billing policies
that allow developers to offer alternative billing methods, and it is expected that other markets may follow suit. Further complicating
this landscape, a recent ruling by the United States District Court for the Northern District of California in Epic Games v. Google
mandates that Google must open its Android app store to third-party competitors for three years, from November 1, 2024 through November
1, 2027, which will likely foster increased competition and could lead to changes in fee structures and app distribution practices.
Should we choose to explore such policy initiatives
for the benefit of our business and our users, we may potentially become subject to highly nuanced, country-specific billing policies
and commissions of major app store operators, we may need to devote more resources and time in creating and managing separate app bundles
for each country in which we want to offer alternative billing options, which could become burdensome, and/or we could become subject
to higher commissions overall. Furthermore, changes to billing options may cause a disruption to the user journey, which could cause a
decrease in paying user conversion rates. Alternatively, choosing not to explore such policy initiatives could present a risk of missed
opportunity. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.
If we violate, or a platform provider believes
we have violated, its terms of service, the platform provider reserves the right to limit or cease access to their platform. If we are
unable to maintain a productive working relationship with any platform distribution and access to our products and services could also
be curtailed or permanently disabled. This is especially true in instances where we are dependent on single source providers for their
respective services. Any limitation or discontinuation of access to any platform could significantly reduce our ability to distribute
and/or provide access to our products to users and would like result in materially and adversely affecting our business, financial condition
and results of operations.
Our business depends on the availability of mobile
app stores and other third party platforms and any outages that these parties experience will likely have a negative impact on our business,
financial condition, results of operations or reputation.
If technologies designed to block the display
of advertisements are adopted en masse, or if web browsers limit or block behavioral targeting technologies our revenues may be adversely
affected.
Technologies have been developed, and will likely
continue to be developed, that can block the display of advertisements on our digital products and services. We may suffer negative consequences,
including a material reduction of revenue, with mass adoption of website ad blocking technologies or other technologies that limit the
ability to personalize advertisements, including, without limitation, if the price for this advertising inventory declines. We generate
substantially all of our revenue from advertising, and ad-blocking technologies may prevent the display of certain advertisements appearing
on our platform, which could harm our business, operating results, and financial condition. Existing ad-blocking technologies that have
not been effective on our platform may become effective as we make certain platform changes, and new ad-blocking technologies may be developed
in the future.
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Activities of our advertiser clients and/or
users could damage our reputation or give rise to legal claims against us.
Our advertisers and/or users may not comply with
international or domestic laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of our
advertisers and/or users to comply with laws or our policies could damage our reputation and expose us to liability under these laws.
We may also be liable to third parties for content in the advertisements or content we deliver or distribute if the artwork, text or other
content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory,
unfair and deceptive, or otherwise in violation of applicable laws. Although we generally receive assurance from our advertising partners
and users that their advertisements and content, respectively, are lawful and that they have the right to use any copyrights, trademarks
or other intellectual property included in an advertisement or content, and although we are normally indemnified by the advertisers, a
third party or regulatory authority may still file a claim against us. Any such claims could be costly and time consuming to defend and
could also hurt our reputation within the mobile advertising industry. Further, if we are exposed to legal liability, we could be required
to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend significant
resources.
We may not be able to continually meet our
users’ expectations and retain or expand our user base, and our revenues, profitability and prospects may be materially and adversely
affected.
Although we constantly monitor and research our
users’ expectations, we may be unable to meet them on an ongoing basis or anticipate future user needs. A decrease in the number